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Accounting 312- ch 16 - Accounting 312 Chapter 16...

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Accounting 312 Chapter 16- Accounting for Compensation Salary and Bonuses I. Effective Compensation Programs 1. motivate employees to high levels of performance 2. help retain key employees and recruit new talent 3. base compensation on employee and company performance 4. maximize the employee’s after-tax benefit and minimize employer’s after-tax cost 5. use performance criteria that the employer controls B. the accounting for salary is straightforward: companies should report as compensation expense the amts paid to employees for salaries and wages per the employment contract; they report as a current liab the amts owed to employees for salaries at the end of the acctg pd 1. must consider payroll deductions, compensated absences and bonuses II. . Payroll Deductions 1. include taxes, insur premiums, employee savings, and union dues 2. to the extent that a co has not remitted the amts deducted to the proper authority at the end of the acctg pd, it should recognize them as current liab A. Social Security Taxes a. funds for pymts to OASDI come from taxes levied on both the employer and the employee i. employer collects employee’s share of tax by deducting it from the gross pay and remit to gov’t along with their share ii. referred to as FICA tax iii. 6.2% based on the employee’s gross pay up to a $97,500 annual limit b. optional Medicare taxes- Hospital Insurance Tax i. 7.65% on an employees wages to $97,500 and 1.45% in excess of $97,500 c. companies should report as a current liab the amt of unremitted employee and employer Social Sec tax on gross wages paid B. Unemployment Taxes 1. FUTA tax required if: a. those who paid wages of $1500 or more during any calendar quarter in te yr or preceding yr b. those who employed at least one individual on at least one day in each of the 20 wks during the current or preceding calendar yr 2. only employers pay the unemploy tax 3. differs by state 4. 6.2% on the first $7,000 of compensation paid to each employee during the year; the employer receives tax credit not to exceed 5.4% for contributions paid to a state plan for unemployment comp 5. merit rating- reduces the state contribution rate a. ie: reduction if display their benefit and contribution experience that they provide steady employment 6. because both the fed and state unemployment taxes accrue on earned comp, co should record the amt of accrued but unpaid employ contrib. as an operating expense and as a current liab when preparing financial statements at yr end
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C. Income Tax Withholding 1. employers withhold from each employee’s pay the applicable income tax due on those wages a. amt depend son the length of the pay period and each employee’s taxable wages, marital status and claimed dependents III. Compensated Absences A. they are paid absences from employment- such as vacation, illness, holidays B. companies should accrue a liability for the cost of compensation for future absences if all of the following exist: 1. the employer’s obligation relating to employees’ rights to receive comp for
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